Attracting Foreign Direct Investment (FDI) in Africa

Attracting Foreign site Investment (FDI) in AfricaThe developing economies of Africa must on their part make delibe enumerate and uphold efforts to attract the much needed inflows of foreign investments. To achieve this, the enabling economic, monetary and policy-making environment for such inflows must be created. An economy that is unresolved to higher levels of semipolitical in constancy, economic uncertainties and monetary take chances will non be able to gain the confidence of investors. These endangerment factors if not rise mitigated with a great degree of hydrofoil and accountability could come as barriers to both local and foreign investments. According to Banz and Clough (2002), the major reasons among umteen others for not investing in developing economies be the lack of transp atomic number 18ncy and poor governance policies. Therefore, Nigeria and other developing economies of Africa must work towards an environment that has a relatively reasonable econ omic fortune, ensure political stability and demonstrate moderate monetary risk to attract foreign bang-up inflows especially in the form of equity investment.The Economic Community of westside African States (ECOWAS) marts to which Nigeria belong lead of youthful experienced whatever legal, regulative and supervisory changes resulting into increased transparency in the operation of their markets. The liquidity of the markets have increased and operations also liberalized to attract more foreign investors. The Nigerian economy is the largest of the 15 member body and has a lot of political and economic make up ones mind over the other members. Conscious efforts have been make by the various member countries to partially open up their economies, finished with(predicate) systematic privatization programs, overhauling of their legal and financial institutional infrastructures and use of modern trading platforms have resulted in current development of their markets and mana ge to attract some foreign direct investments (FDI) to them.Nigeria is currently the biggest economy in Africa after the recent rebasement of its GDP, thitherby beating southwest Africa to the second place ((Magnowski, 2014). The pet pieceum celestial sphere accounts for roughly 80% of fiscal revenues and 90% of export earnings (World tier book).The region is also one of the major exporters of petroleum, and plays a significant role in OPEC (OPEC Annual Statistical Bulletin 2013). To convert its economy Nigeria is encouraging the egression of their semiprivate sector by offering some incentives to private sector equity investors who are willing to invest in the verdant.The province has an increasing GDP of $422.6bullion, $450.4 million and $502 billion for the years 2011, 2012 and 2013 respectively, and diminishing foreign debt inventory of $15.73 billion and $13.4 billion for 2012 and 2013 respectively. There is also an increasing Foreign Direct Investment of $7.444 bil lionand $9.212 billion for 2012 and 2013 respectively (World Fact book World Bank).The Nigerian Stock Exchange (NSE) is the second largest supersede in Africa it was established in 1960 to provide listing and trading services among others. Its activities are regulated by the Securities and Exchange Commission (SEC) of the farming. The value of publicly distri simplyed shares stood at $50.88 billion, $39.27 billion and $56.39 billion for 2011, 2012 and 2013 respectively.Despite all the above mentioned strong economic fundamentals or good indicators, Nigeria has been plagued by several daunting challenges, notable among them are the issues epileptic power supply, inadequate infrastructures, insecurity, endemic corruption, increasing rate of unemployment and its heavy opinion on petroleum products (Global edge, 2014 World fact book). These factors pose some uncertainties closely the Nigerian economic and ocellus market outlook.Nevertheless, the Nigerian economy is understood gro wing. Fortunately, the government is also conscious of some of these teething problems. Programs are initiated to diversify the economy in the areas of agriculture, power, telecommunication, transport and other services. These efforts seem to be compliant the desired results as evidenced in the terra firmas 6-8% per annum pre-rebasing growth rate. With these measures a seemingly conducive economic environment is created which could be utilize by investors. This therefore, presents reasonable economic risk. There is also institutionalized body politic leading to political stability in its own form in terms of the countrys ability to carry out state programs. Nigeria is also able to finance its commercial and trade debt obligations and has at no time neglectfulnessed in payment of its external financial commitments thus demonst rate relatively moderate financial risks.These indices send strong signals in terms of reading content about Nigerias overall economic health to domesti c, supra bailiwick investors and rating agencies among others. Therefore, it will be of interest to empirically explore how these factors (economic, financial and political risks) when taken together or separately can cloak the countrys stock market performance and vice versa. farming risk ratings assess the probability of a countrys default on its debt from a variety of perspectives from socio-economic condition to growth in the hearty gross domestic product (GDP), government stability to corruption, to exchange rate stability among others.The objective of this publisher is to empirically investigate the short and long-term kindreds between Nigerias country risk ratings political, economic, and financial ingredients and its stock market in order to provide further instruction for current and possible investors to enable them make better informed investment decisions. In our experience this is the first few studies of this nature conducted on an emerging economy standard ised Nigeria.Our main instrument of investigation is the Autoregressive Distributed Lag (ARDL) approach formulated by Pesaran and Pesaran (2009) and Pesaran et al. (2001), to empirically investigate the similarityships. The ARDL method is adopted because of its econometrics techniques. One important favor of the ARDL model over other traditional approaches is that it can be apply in time-series data irrespective of their order of integration, whether I(0), I(1) and/or fractionally integrated (Pesaran and Pesaran, 2009). The ARDL approach can also test for cointegration by the bounds testing turn and can estimate the short-run dynamics and long-run relationships.The rest of the paper is organized as follows section two discusses related literature. Section terzetto explains the methodology adopted in this paper. Section four presents the ARDL procedure and discusses its empirical findings. Conclusion and implications are given in section five.The globalization of trade and fina ncial markets in the past years has created huge investment opportunities and its listener risks. It has therefore, becomes inevitable to know the assent chargeiness of participating players. The motive lowlife such an assessment of the economic and financial condition and sometimes political stability of a country is to be able to evaluate the country credit risks involved in doing business or investing in such a country. Any event in a country that will affect not only the prospect of profitability but also restrict the movement of capital in the form of profits, dividend etc is worth evaluating.The need for such critical evaluation of credit worthiness of countries has resulted in the establishment of several rating agencies such as Fitch, Moodys and Standard Poor among many others. These risk ratings are considered as apocalyptical of possible future default. A higher rating is seen as a lower risk of default, slice a lower score indicates a higher risk of default. Though the primary significance of ratings is due to their doctor on interest rates at which countries source for funds in the international financial markets, studies have also shown its influence on stock market movements. This argument is linked to the influence of country credit risk ratings on the inflows of Foreign Direct Investments (FDI), into the hosts economy, especially through equity shares investments.There is no scarcity of research papers on monarch ratings and their critical roles for encouraging and facilitating investment flows especially in highly-developed economies, but there is paucity of studies conducted on the impact of these ratings on movements of national stock markets, particularly for emerging markets such as Nigeria. Some of the earlyish studies by Erb et al (1995, 1996a, 1996b) show that there is association or relationship between country credit risk (i.e. the risk of a countrys inability to service its external debts) and returns on equity investments. The innovation of relationship between country credit ratings and stock market returns was affirm in the early work of Erb et al. (1996a) using data that cut across boundaries. As a follow up to their earlier work, Erb et al. (1996b) investigated the influence of economic, financial and political risks on judge fixed income returns. They show that there is relation between the country risk measures and world bail market expected returns. For the ICRG economic variable, they find positive and significant signs in unhedged, local, and foreign exchange portfolio returns. They also show that the country risk attributes are significant to the real yields of fixed income securities.Kaminsky and Schmukler (2001) also examine the influence of sovereign ratings and outlook changes on the sensitivity of emerging financial markets. They find that these variables have substantial influence on both bond and stock markets. A domestic rate is associated with an average increase change rate of two percentage points in bond yield spreads and a decrease of one percentage point in stock returns. Suba (2008) expressed a contrary view, stating that in most cases news of a downgrade is often anticipate earlier before its announcement therefore the potential negative effect of such information on stocks and exchange rate returns is diluted.The impacts of rating changes on both bond yield and sovereign debt have been tested severally by many authors. Reisen and Maltzan (1999) using the three main rating agencies, find that there is vulgar interdependencies among rating changes and changes in bond yield spread. The study by hazan and Packer (1996) also reported similar findings. Among several authors that have provided worthful insight into the influence of rating changes on sovereign debt and corporate securities are Hand et al. (1992) and Richards and Deddouche (1999). The degrees of sensitivity in all these studies tend to vary belike because of the methods used for the co untry risk analysis.Hammoudey et al. (2011) using emerging economies Brazil, Russia, India, China and South Africa ( car parkly referred to as the BRICS countries) establish various degrees of sensitivities of these countries stock markets to their respective country risk ratings. China is most sensitive to all the risk variables, followed by Russia, while all the BRICS countries show moderate economic risk sensitivity.The spillover effect of sovereign debt rating changes on national stock markets and international debts is also confirm by various authors, among them are Ferreira and Gama 2007 Li et al 2008. This situation is common among countries that share common economic features and unrestricted Evidence of flow of information. putting green border also suspected to play a significant role.regional stock market movements are also influenced by country credit risk rating news. This development is consistent with the study by Christopher et al. (2008), stating that there is a po sitive relationship between the two factors. While let et al. (2004) in their study, though under a different setting did not find any sensitive association among the two variables. Turkeys stock market index also seems to have association with its economic, financial and political risk ratings. Using Autoregressive Distributed Lag (ARDL) model, Sari et al. (2013) established a steady long-run relationship among the stock market and some of the risk variables.There are many leading commercial publishers of country and political risk analysis, but data for this study is sourced from the International Country hazard Guide (ICRG) economic, financial and political risk ratings for Nigeria covering the period 2001 to 2013. The ICRG rating system is made up of 22 variables representing three major components of country risk, namely economic, financial and political. These variables essentially represent risk-free measures. There are 5 variables representing to each one of the economic and financial components of risk, while the political component is based on 12 variables (Hoti, 2003). The specified allowable range for each factor reflects the weight attributed to each factor. A higher score indicates a lower risk and vice versa. The stock market returns variable is obtained by taking the first logarithm difference of the monthly stock of the Nigerian Stock Exchange (NSE) for the period earlier specified.s